Fund managers fear central banks will create next ‘Lehman’ moment

BERLIN (MarketWatch)—Negative interest rates, ultracheap loans and aggressive quantitative easing—central banks are doing everything they can to prevent another financial crisis, but their unconventional measures are instead creating a massive risk to the global economy, top money managers say.

Gathering for the international FundForum in Berlin this week, more than 1,300 fund managers spent three days discussing the current investment outlook and the central banks’ monetary “experiment” emerged as a major concern for the industry.

“I think it’s fair to say it is an experiment because it hasn’t been done at this magnitude of negative interest rates. So many sovereigns have negative interest rates,” said Alexander Ineichen, founder of Ineichen Research and Management.

“In 2008 we had a Lehman moment and central banks stepped in, which was nice. But a lot of the structural issues have not been resolved. A lot of the leverage just went from the private sector to the public sector. My guess is that the next big risk, the next ‘Lehman moment’ is the sovereign. It’s because the problems are now there. The risks are structural,” he said.

The collapse of Lehman Brothers in 2008 is seen as one of the key triggers of the global financial crisis, which left central banks scrambling for ways to save the world economy. First interest rates went a lot lower, but policy makers eventually had to take more drastic measures, such as buying government bonds, commonly referred to as QE, and offering historically cheap loans to banks.

However, now almost eight years after the onset of the crisis, the ultraloose monetary policy still hasn’t adequately boosted global growth. Many economists blame governments for failing to pursue more aggressive fiscal stimulus.

Regardless, that means several central banks are taking even more radical measures in the form of negative interest rates. Japan and the eurozone are the biggest economies to try it out, but also Switzerland, Sweden and Denmark have ventured down that avenue.

The European Central Bank was set Wednesday to begin purchasing corporate bonds as it expands the scope of its asset-buying program.

There is also speculation that the Bank of Japan and the European Central Bank may experiment with so-called helicopter money—a policy where central banks effectively print money and hand it over to households or businesses in an effort to boost private spending.

“While central banks have stepped up, and they stepped up in a manner that very few people expected in terms of their willingness to take risk, they simply didn’t have a choice,” said Mohamed El-Erian, former Pimco chief executive and current chief economic adviser at Allianz.

“Think of central banks like a doctor. They’re walking by, they see their patient—the global economy—in trouble. They will not walk away from the patient. They are wired to respond even if they don’t have the right medication,” he said. “What happens when you respond for a very long time with the wrong medication? You start worrying about side effects, you start worrying about unintended consequences. That is where we are today.”

That has left economists and fund managers worried the unconventional measures are setting the stage for exactly what central banks are trying to prevent—another financial crisis. When asked about the biggest risk to the world economy and investment outlook, “policy mistake” was the most common answer among the attendants at FundForum, including El-Erian.

A “policy mistake” could come in the form of the Federal Reserve hiking interest rates too fast, central banks keeping rates in negative for too long, helicopter money or issues regarding the exit of QE programs.

“Central banks had no alternatives during the financial crisis. We know how and why we got to where we are, but they and everyone else knows we can’t stay like this forever,” said Lucy MacDonald, chief investment officer at Allianz Global Investors.

“[The worst-case scenario] is either you have an early exit that makes everything shudder to a halt, but there’s a relatively low probability of that. More likely is that everything shudders to a halt anyway and you then have to have more stimulus and you never get out of this,” she said.

The Fed meets on June 14-15, but after a weak U.S. jobs report and dovish comments from Fed Chairwoman Janet Yellen, no rate changes are expected this time.

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